The Consumer Financial Protection Bureau (CFPB) is on a roll targeting debt collectors and your company could be the next target. On October 3rd, the CFPB filed an enforcement action asking for a $1.376 million civil penalty to be assessed against Meracord LLC, a leading debt-settlement payment processor, for allegedly assisting third parties to collect millions of dollars in illegal upfront fees from consumers. Last month, the CFPB filed an enforcement action against JP Morgan Chase, mandating that they pay $389 million in refunds and fines for improperly billing customers for optional products. These actions demonstrate the building block approach the CFPB has been taking through enforcement actions to put teeth into its emerging policies.
Under the Fair Debt Collection Practices Act (FDCPA), any company trying to collect on their own debt may now be considered debt collectors by the government and a potential target for these type of enforcement actions. Communications seeking consumer payment are subject to new regulations and potential liability. Recently, the CFPB outlined its intention to regulate unfair, deceptive and abusive practices, extending requirements similar to those contained in the FDCPA to all companies engaged in debt collection activities with individuals.
In July, August and September of this year, the CFPB issued bulletins to address debt collection activities of lenders and debt owners collecting on consumer debts. Debt collection practices have been governed by the FDCPA since 1977, and have traditionally been policed by the Federal Trade Commission (FTC) and regular state authorities. Further, the prohibition on unfair, deceptive and abuse practices under the FDCPA generally only covers third-party debt collectors, and not financial institutions or law firms. Not anymore. The CFPB acquired significant authority over debt collecting entities beginning in January 2013 and is now collaborating with state Attorneys General and, to some extent, with the FTC, which retains some authority over debt collection practices as well.
CFPB Bulletin 2013-07
Issued in July, this bulletin places lenders on notice that their activities in collecting their own consumer debt will be the subject of heavy scrutiny. It provides guidance that “covered persons” under the Dodd-Frank Act will similarly be prohibited from engaging in unfair, deceptive, or abusive practices in their debt collection acts. It then defines each.
Under the Dodd-Frank Act, an act or practice is considered unfair if 1) it causes or is likely to cause substantial injury to consumers, 2) the injury is not reasonably avoidable by consumers, and 3) the injury is not outweighed by countervailing benefits to consumers or to competition. According to Dodd-Frank, the following constitute substantial injury to a consumer: monetary harm, fees or costs paid due to unfair act. However, such injury does not have to be monetary, as emotional impact may apply. Nor is actual injury required: the consumer’s exposure to the risk of significant harm may also be considered substantial injury.
Injuries not reasonably avoidable include those caused by acts or practices by a debt collector that 1) hinder a consumer’s ability to make informed choices, or 2) interfere with the consumer’s chance to take action to avoid injury. Other injuries not reasonably avoidable include those caused by transactions that occur without the consumer’s knowledge.
Under the Dodd-Frank Act, an act or practice is considered deceptive if the act misleads or is likely to mislead a consumer, the consumer’s interpretation is reasonable under the circumstances, and the misleading act or practice is material in nature.
Information considered likely to mislead must be considered in the totality of circumstances. Omissions of information may be as misleading as frank misrepresentations. Implied representations and claims that are not supported may be equally misleading.
Messages that clearly target a specific audience, such as those targeting older consumers or the financially distressed, may often be misleading, as are those that a reasonable consumer could conclude convey more than one meaning.
Dodd-Frank considers abusive acts or practices those that materially interfere with the ability of a consumer to understand any terms or conditions of a consumer financial product or service, or if the act or practice takes unreasonable advantage of 1) the consumer’s lack of understanding of the material risks, costs or conditions of the product or service, 2) the consumer’s ability to protect his or her interests in selecting and using the product or service, or 3) a consumer reasonably relies on the lender to act in the consumer’s best interests.
Material information is defined as information likely to affect a consumer’s choice of, or conduct regarding, the product or service, or information that is likely important to consumers.
Disclosure adequacy will be determined by the following criteria: whether disclosure is prominent enough for consumer to notice, whether the information is presented clearly, whether the information is easy to understand, and by issues related to the placement of the information, such as its proximity to other claims it qualifies.
Time Barred Collections
An area of significant concern is collections on time barred, or “obsolete,” debt. The CFPB filed an amicus brief on August 14, 2013 in Delgado v. Capital Management Services, LP, et al, urging the 7th Circuit to affirm the district court’s refusal to dismiss a class action complaint alleging that a debt collector’s letter offering a settlement of the plaintiff’s credit card debt violated the FDCPA because it did not disclose the debt was time-barred.
The plaintiff class alleged that the failure to disclose that the debt was time-barred was misleading, even though the letter at issue did not threaten litigation. In the CFPB’s amicus brief, the bureau argues that a time limited settlement offer can mislead a consumer without sophistication to think that a debt is enforceable, even when it is not. The CFPB argues that this type of settlement offer in the future must expressly disclose that the collector cannot legally sue on the debt to avoid creating the impression that the collector may sue if payment is not made by the deadline.
This position is especially noteworthy because the FDCPA does not require debt collectors to disclose that a debt is time-barred when attempting to collect on it. If this view is accepted by courts, it would impose such a requirement on any settlement offer that is not left open indefinitely.
CFPB Key Areas of Focus
The CFPB will pay special attention to the following types of activities:
Collecting or assessing a debt and/or any additional amounts in connection with a debt (including interest, fees, and charges) not expressly authorized by the agreement creating the debt or permitted by law.
Failing to post payments timely or properly or to credit a consumer’s account with payments that the consumer submitted on time and then charging late fees to that consumer.
Taking possession of property without the legal right.
Revealing the consumer’s debt, without the consumer’s consent, to the consumer’s employer and/or co-workers.
Falsely representing the character, amount, or legal status of the debt.
Misrepresenting that a debt collection communication is from an attorney.
Misrepresenting that a communication is from a government source or that the source of the communication is affiliated with the government.
Misrepresenting whether information about a payment or nonpayment would be furnished to an agency.
Misrepresenting to consumers that their debts would be waived or forgiven if they accepted a settlement offer, when the company does not, in fact, forgive or waive the debt.
Threatening any action that a service provider does not have the authorization to pursue, including false threats of lawsuits, jail, etc.
The CFPB stated that it will closely review any covered person or service provider’s consumer debt collection efforts for violations of the Federal consumer financial laws. Further, the CFPB will use “appropriate tools” to evaluate whether supervisory, enforcement, or other actions may be necessary.
CFPB Bulletin 2013-08
This bulletin advises lenders and debt owners (together with their service providers) that the FDCPA and the Dodd-Frank Act together prohibit “covered persons” or service providers, including debt collectors, from engaging in deception while collecting on consumer debts.
The bulletin provides specific guidance that that creditors and debt buyers are prohibited from making deceptive claims regarding the relationship between the consumer paying a debt in collection and:
Improvements in a consumer’s credit report, credit score, and creditworthiness representations that there is an increased likelihood that a consumer will receive credit from a lender of more favorable credit terms.
Effects on credit reports, including representations that a payment on an obsolete debt will result in the removal of it on their credit report, representations that it would not have appeared anyway if over seven years old, and assertions that payments on debts will only change on credit report if furnished to credit reporting agencies.
Effects on credit scores, including representations that payments may not improve a credit score due to numerous factors that influence individual scores.
Effects on Creditworthiness: debt collectors may deceive consumers if they make representations about the nature or extent of improved creditworthiness that results from paying certain debts.
In investigating claims, the CFPB may review communication materials, scripts, training manuals and related documentation. In addition, the CFPB will assess whether additional supervisory, enforcement or other actions may be necessary.
CFPB Bulletin 2013-09
The most recent bulletin, issued in September 2013, specifically addresses furnishers’ obligations to “review all relevant information” they receive in connection with disputes forwarded by credit reporting agencies (CRAs). The CFPB expects furnishers to have reasonable systems and technology in place to receive and process notices of disputes and information regarding disputes, including relevant documentation, forwarded to them by CRAs.
CFPB also expects every furnisher to review and consider “all relevant information” relating to the dispute, including documents that the CRA includes with the notice of dispute or transmits during the investigation, and the furnisher’s own information with respect to the dispute.
The CFPB expects each furnisher to comply with the FCRA (Fair Credit Reporting Act) by:
Maintaining a system reasonably capable of receiving from CRAs information regarding disputes, including supporting documentation;
Conducting an investigation of the disputed information including reviewing “all relevant information” forwarded by the CRA and the furnisher’s own information with respect to the dispute;
Reporting the results of the investigation to the CRA that sent the dispute;
Providing corrected information to every nationwide CRA that received the information if the information is inaccurate or incomplete; and
Modifying or deleting the disputed information, or permanently blocking the reporting of the information if the information is incomplete or inaccurate, or cannot be verified.
Any furnisher not currently maintaining a process that meets these requirements should take immediate steps to comply with the requirements of the law.
In summary, the CFPB is 1) monitoring complaints received from consumers; 2) prioritizing examinations on the basis of risks posed to consumers; 3) taking appropriate supervisory and enforcement actions to address violations; 4) seeking all appropriate corrective measures, possibly including remediation of harm to consumers; and 5) continuing to review furnisher compliance with these requirements during examinations and investigations.